The Bank of Canada (BoC) and the Office of the Superintendent of Financial Institutions (OSFI) have announced plans for a pilot project to use climate-change scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy.

Intact Financial, Manulife, Royal Bank of Canada, Sun Life Financial, TD Bank Group and Co-operators Group Limited have all agreed to voluntarily participate in the project.

“We need to accelerate our work to understand the implications for the economy and the financial system," said Bank of Canada Governor Tiff Macklem. "This project will generate valuable lessons for assessing and managing climate risks. With the private sector's help, we will be able to combine climate analysis with economic and financial data to ensure we have the best information possible to fulfill our mandate."

Bank of Canada and OSFI to develop scenarios

Building on previous work on climate-change scenarios for the global economy, the BoC and OSFI will first develop a set of climate-change scenarios that are relevant for Canada. Using these scenarios, the companies will explore the potential risk exposures of their balance sheets. The Bank and OSFI will publish a report, planned for the end of 2021, sharing details on the specific scenarios, methodology, assumptions and key sensitivities.

"Everyone, including the financial sector, will have to adjust to the new reality of climate change. The shape of that new reality will depend on many complex issues and on much that remains uncertain," said Jeremy Rudin, Superintendent of OFSI. "This pilot project will allow us to refine our focus on the prudential aspects of climate change."